Unaffordable (That’s What You Are)

Sobering Warning from the Governor of the Bank of Canada on Vancouver housing costs

To deliver his key address on Housing in Canada in June 2011, Bank of Canada Governor Mark Carney chose his venue carefully, appearing in Vancouver at the Board of Trade. (1) He noted that Vancouver’s average selling price was now 11 times the average family’s household income—a level is so extreme that its primary comparable is Hong Kong—the least affordable city in the world.

Indeed, he said, Vancouver seems to be

“taking on characteristics of financial asset markets, where expectations can dominate underlying forces of supply and demand. The risk is that expectations become extrapolative, prompting the classic market emotions of greed and fear—greed among speculators and investors—and fear among households that getting a foot on the property ladder is a now-or-never proposition.”

Carney identified two drivers of Vancouver’s explosive housing market growth: low interest rates and the movement of Asian capital into “selected international housing markets as those investors seek out diversification and hard assets.”

Relative to household income, our property values are now among the most severely unaffordable in the world. Relative to income, Vancouver’s property values are 56% higher than New York’s, and 31% higher than London’s.

In its November, 2011 report on the Canadian housing market, RBC notes that 94% of average household income is required to cover the ownership costs of a 2 storey detached home in Vancouver. (2)

This development is new and unprecedented.

Corrosive Effect of Housing Costs

As Carney laid out in his address, housing not only meets a fundamental human need, it can affect a region’s financial stability. Excesses in the housing sector can generate key vulnerabilities in the financial system and the economy as a whole.

Rather than stimulating productivity and competitiveness through business investment, cheap credit has been used to bid up the price of houses.

Vancouver residential real estate values began to detach from their historical relative values to the rest of the Canadian market sometime around 2006, when volatility began to get very choppy.

Chart 16 from Mark Carney’s June Address on Housing

Many see Vancouver in a housing bubble, and it may well be. Others however, such as celebrated architect Gregory Henriquez, think our prices still have far to go to reach that point. Amazingly, Henriquez says that Vancouver is still under-priced. He is not looking at local economic conditions, however, but at the international forces in play. Viewed globally, Henriquez says that our market has become the “safety-deposit box for the world.” (3)

What distinguishes Vancouver from major capitals such as London, New York and Hong Kong is that our economy doesn’t generate global incomes. In fact, with median incomes ranking us in the bottom third of Canadian cities (below Sudbury, Regina and Windsor) Metro Vancouver is best described as a relatively low-income urban region.

Our unemployment rate among the under-25 year olds is 17%.

As Jock Finlayson of the BC Business Council describes it, Vancouver has “a limited base of high-paying jobs, a large local population of disadvantaged individuals, and high rates of immigration—coupled with the difficulties many new Canadians face in finding employment.” (4)

All of these circumstances militate against Vancouver being able to compete in the global marketplace for the best and the brightest talent needed to drive the knowledge and creative economies that will sustain cities in the future.

Our universities are losing key talent and find themselves unable to attract replacements or build on what we have. Our business sector cannot recruit, our local merchants are caught in a fight for an ever-dwindling supply of disposable incomes, and attitudes are hardening against even modest tax increases necessary to maintain our basic infrastructure.

Is It a Beautiful Day in the Neighbourhoods?

This dynamic is playing out on the ground in Vancouver in bizarre ways.

Local realtor Andrew Hasman sees the reality daily, and believes that for single family homes, the local person “is completely out of this market”. He reports that international buyers pre-dominate, often buying 5 or six homes.(5) The Canadian Real Estate Association reports that since 2009 our percentage of residential real estate transactions exceeding $1 million has doubled to 20%, compared with 5% in Toronto. (6)

Many Vancouverites seem unaware of the strange drama unfolding in many of our neighbourhoods.

The west side of the city is shedding residents almost daily as international buyers purchase more and more housing stock. These homes often sit empty or are re-cycled into the market and re-sold at significant gains within months to other international purchasers.

The west side real estate market is behaving exactly like a secondary market in financial instruments rather than a shelter market. Often the commodity is not actually used or consumed, but only traded. This trait allows valuations to inflate so long as the market is supported by global buyers, completely independently of local economic conditions.

During the recent civic election I was twice approached by people who reported that their homes were the only ones occupied on their block.

Imagine the strangeness of a neighbourhood without neighbours. Increasingly, this is becoming a reality for west-siders.

One person wrote recently reporting that her neighbour, a west side real estate appraiser, says that

“all of his work was now with (international) buyers….very few spoke English, translators were used in virtually all the transactions.”

The east side of Vancouver is a study in contrasts. Unattractive to international capital, this neighbourhood is filling with our new residents. The following is excerpted from an email from a Canadian Chinese supporter, who asked to remain anonymous:

“I am in my 40′s in East Vancouver, family of 5, middle class, and only recently bought for our family in 2009. I am Chinese, and furious of all the rumors within our community of the billions of $$$ (leaving) China that needs safe harbour.

I hate what this city has become, a neighborhood of illegal suites, 2 or 3 suites per house… Try going to an open house in East Van, there are rooms with numbers on them some times, and rooms subdivided into more rooms, and garages turned into suites.”

Others on the east side are suffering. Former City Councillor Ellen Woodsworth has herself been evicted, as her home of 32 years has been sold from under her.

On Vancouver’s south side, in Little India on Main Street, vacancies in commercial real estate abound. One shopkeeper said that neighbourhood South Asians are uprooting en masse and moving to Surrey. Young people are leaving, having lost hope of ever affording a home in their own city, and taking their parents with them. This second generation store owner has just opened a thriving new 15,000 sq ft store in Surrey. At the family’s struggling parent store on Main Street, he is lucky to make 2 sales a day. Many businesses around him sit vacant as their market has up and left, taking with it part of Vancouver’s heritage and history.

Business closures abound in the formerly thriving neighbourhood of Little India on Main Street.

In the West End, elderly ladies related their own struggles one weekend afternoon during the civic campaign. They are spending, most of them, 60-70% of their incomes on rent for apartments they have lived in for decades. Many have worked almost 50 years, saving for retirement, and now find themselves worried about reno-victions. This is the practice by real estate investors of evicting tenants of older buildings to facilitate an upgrade so as to obtain higher rents on the property. With their retirement savings vanishing into rent, these renters have no idea what will happen to them once their resources are exhausted.

At UBC a Canadian Chinese pastor described his congregation of mainly Asian graduate students, university professors and employees. Almost all of them rent, he reports, and everyone is at the end of their rope over housing expenses. It is common for people to give up and move away. These are precisely the immigrants Vancouver needs to build our future, but they are being driven out of Vancouver by extreme housing costs.

Young people report that their friends are leaving to take work in other cities, or just moving to more affordable homes in the metro region, feeding a growth boom in cities like Surrey. Even young professional couples, doctors and lawyers, are giving up the dream of raising children in a house if they remain in Vancouver.

At the top end of the market is another family I spoke with during the campaign. They recently moved to the city to be with an aging parent. The husband is a senior executive recruited as one of the top hires in Vancouver in 2011, and the wife is a working professional. Their combined income easily places them in the 1%. Despite selling a luxury home in one of Calgary’s most desirable neighbourhoods, Vancouver’s housing market is completely out of reach even for them. They currently rent in North Vancouver.

Hear No Evil

Yet Mark Carney’s sobering warning last summer seems to have fallen on deaf ears. To hear local developers, urbanists and planners discuss this issue, you would think our market is within the normal range, and people concerned about the speculative spree fueled by interest rates and global capital influx are alarmists and potentially xenophobic.

The theory currently dominating the discourse on our housing market points to natural or systemic causes for our pricing: our limited land base pressured by in-migration. According to this view, the cure for this market is to build more housing—ie. condominiums.

Yet in-migration is occurring at historically normal rates and we didn’t grow mountains and a southern frontier overnight. We don’t know the profile of our in-migration population, but few of them are likely to be able to manage our condominium costs—the highest in Canada. We could be facing a more troubling development; that most of our increased population is either disadvantaged or non-investor immigrants—renters at the low end of the market. These are the people filling up divided rooms and garages in East Vancouver, while homes in Shaughnessy sit empty.

Conclusion

It is time to take off the rose-coloured glasses and face some hard truths. We need a thorough and rigorous analysis of our housing market, the causes of its extreme condition, the risks it poses for our long-term economic sustainability, and a study of the levers and mechanisms available to government to modulate those risks.

After concerns about global speculation on the Vancouver housing market made front page news during the election campaign, Mayor Robertson for the first time allowed that this area needs study.

A family earning $120K/year out of their own free will buys a $1MM house with basement suite close to Main Street. Their property needs about $150K in renovations. I know there are many areas of the city where housing is out of the reach of local mortals and this makes decisions on accommodation more difficult, but the real tragedy is how many families feel the need to compete and are taking large long-term financial risks in doing so.

Taking a broader view, while foreign capital flows are almost certainly contributing to competition, a possible outcome may be that their direct impact, while positive, is small relative to the overall region’s market, and in the absence of direct foreign capital flows there are other ready excuses brought to the fore allowing locals to bid prices up all the same.

We can only guess at the amount of capital inflow. That’s the problem. We have not quantified it or measured its impact on the entire market. Guessing at its impact based on incomplete information is a good way to get this wrong.

We can do some macro calculations based on total metropolitan household income and determine how much capital investment is required to keep prices at their current price-income ratios. That would at least give the magnitude of flows required. That’s something that’s relatively simple to do and the data are readily available.

So yes markets are complex and I welcome pursuing all avenues. Short duration and high convexity debt accumulation by marginal buyers seems a good candidate to be added to the list of potential root causes of high prices, along with other items highlighted in this post.

Gene

November 30, 2011 | 2:05 am

This is really frightening stuff. I would be interested to know if the provincial NDP have this on their radar or if their approach isn’t all that dissimilar from Vision Vancouver’s: band-aids instead of a proper diagnosis and treatment.

Surrey might be more affordable but the developer-driven communities that are being built out there are so devoid of any kind of environmental aesthetic that they will soon resemble the unfortunate housing estates that popped up all over Britain after WW2; and were urban nightmares by the 1980′s.

I also understand that the Economist continually ranks Vancouver as one of the most livable cities in the world … without taking into consideration the cost of housing here??

I moved here from LA and have seen what happens first hand when housing prices go over the top–sooner or later the bubble bursts and then you have real problems-on the brite side, LA is now affordable again whereas Vancouver is off the charts…whodathunk?

Thank you for taking this on. I know one needs to be politically careful, but the clear truth is that prices need to go down to fix this. There will be casualties. How about a large special municipal/provincial tax on CMHC insurance over 300k? The hot “immigrant” money will solve itself.

Housing in Vancouver is a resource, just as oil is in Alberta. The forces that are driving the the huge inflationary leaps in property values are primarily offshore investors who, apparently, have the resources to purchase many high value proprieties in order to reduce the number of available units and, therefore, act as a part of the force driving inflation. A few well connected, hard working realtors profit from this ruse, but, how does the population of Vancouver gain from what is very close to a Ponzie scheme?
I suggest a requirement of residencie in order to proceed with these purchases.
I love foreign investment. Let it be in mills, hydro electric projects, factories, research and so on. But flipping properties to the extent our citizenry is pushed out of the market is grossly unfair.
A one year residency clause is required before a student may access British Columbia Student loans.
Four years ago you had to reside in the United States in order to purchase the simple eReader known as the Kindle.
Affordable housing is a right for Canadians, not a privilege for foreign property flippers. It will continue until we stop it.
Thank you
Jim

Loved this comment. A simple requirement of residence would solve this issue. The problem is that the government loves the income they receive from the sale and resale of these properties, and so, we’re likely to never see this occur. Those who make the decisions have enough money to not be affected by this crisis. As a 22 year old recent graduate in Vancouver, I fear for my future in this city. I would hate to leave my home and move to a different city just to be able to afford a roof over my head, but it might just be my only option.

Jim, good post. I couldn’t agree more. Many jurisdictions impose some criteria and/or limitations on purchasers of real estate in order to ensure that the local populace has the ability/resources/capacity to stay wihtin thier own community. Bermuda and Mexico are two that i know of. Why not here? Drastic action is needed but I fear that our molly-coddling weak-kneed politicians do not have the fortitude or will to take it on and many polite Canadians will think it is un-Canadian. But we have to stop bending over backwards to be politically correct and in the process sewering ourselves and our own culture. Enough is enough. Why should foreigners reap the benefits of a community that many of us have worked for generations to develop, when we no longer can? Its simply not right.

There are a few issues as far as I can see. First is our politicians are funded by developers. Second, we don’t track foreign investment. Third, our Casinos are essentially laundry mats for foreign investors with questionable funds, human smugglers, and drug dealers (local and foreign). Fourth there is no foreign investor controls. If they have enough money they buy their way to the front of the line.

Foreign investors and property speculators should have to pay steep property transfer taxes, while legitimate home owners should have no property transfer tax at all.

Vancouver in the past decade has a lot of similarities to Miami in the 1980′s. Cocaine Cowboys is an excellent documentary about how drugs and property speculation created a massive Real Estate bubble in Miami while the rest of the country was economically depressed. Sure we don’t see as much cocaine or bloody murder on our streets, but we do have our share. A $7 billion dollar marijuana industry, healthy human smuggling and prostitution rings, and heavy foreign speculations have driven prices through the roof. Nobody wants to talk about the dark underbelly of reality. Nobody wants to kill the golden goose. Eventually the market will implode on itself.

[...] Sandy Garossino, independent candidate for city council in the recent civic elections, at her blog votesandy.ca 28 Nov 2011. The entire post is a must read for those concerned about Vancouver housing. Some excerpts below [...]

Many thanks for this thoughtful and eloquent article.
We’ve headlined, excerpted, and commented on it in our chronological archives. http://wp.me/pcq1o-3nU

You are one of the few public figures speaking out on these issues, and we commend you for that. To point out these truths is brave; the thoughts are deeply unpopular in many quarters. As a consequence, most local discussion of these issues has been done ‘underground’, in anonymous online forums. Some individuals, such as Gord Goble and Peter Ladner, have spoken out publicly, and you are a welcome continuation of that move.

We agree with your concerns about the multitudinous deleterious consequences of the massive misallocation of resources that comes with a speculative mania in housing. The optimist in us wishes you well with your endeavours to alter policy for the better. The realist is concerned that the only path forward for the speculative mania is a crash.

Judging by historically valid underlying fundamentals such as incomes and rent levels, Vancouver RE market prices are 2 to 3 times fair value, perhaps even more.
You see the speculative mania for what it is, and you are suggesting we attempt to orchestrate a ‘soft landing’ (no mean feat, if it is possible at all).
That suggestion itself creates a massive dilemma:
Given that there is such a large difference between the market price of properties, and their fundamental values, who do we hope to be buying these properties at perhaps slightly reduced but still massively elevated prices in the coming years?
Wouldn’t any such buyers be risking financial suicide?
Isn’t the only credible resolution a marked drop in prices, and then a recovery from the rubble?
Aren’t band-aid solutions on the way down simply going to put even more locals at dire financial risk?

I think about this issue on a daily basis and it is really starting to get to me. At this rate, I currently don’t see myself in Vancouver for the long term. Though I do love the city, there are other places just as nice. I have multiple friends that have already moved away from Vancouver due to the cost of living and the fact that other cities pay more.

This is why we voted for you, Sandy. But I don’t know that sitting on council would have gotten you–or this issue– anywhere. You can see how it falls on deaf ears especially as developers, bankers and government officials have gone all-in on this strategy rather than look for ways to bring jobs and companies into the province. I’m afraid Mr. Market will have to bring about the end to this and I don’t see it ending any time soon. Email me if you intend to do more and if I can help.

Thanks for the compelling insight Sandy. I lived in Vancouver for 12 years luckily buying an older unit in Kit’s around the leaky condo crises (remember that?). Now, I find myself living in NYC – Brooklyn actually and I find it remarkable that housing in nice neighborhoods in Brooklyn is comparatively cheaper than in Vancouver. I would love to live in Vancouver again but there is little meaningful work and the pay scales in Vancouver are paltry – very sad.

My spouse and I came here on work visas and make over 200K a year. We have a couple young toddlers and live in one of the so-called “up and coming areas” on the edge of downtown. Living here nearly 5 years, the area is still up and coming with still unrealized promises of improvement. Yet, the promised parks and schools are not there, while more condos go up. We lack affordable grocery stores, decent school, and outdoor space for kids but see more signs for upcoming luxury condo development in the immediate vicinity.

I would think we are those people Vancouver should like to keep because we pay lots of tax and can’t even vote and we speak English AND French (among other languages) and are highly educated, living upper middle class lifestyles. However, we can’t afford a house or even bigger condo even in the up and coming parts of downtown because we won’t justify spending over a million for less than 1000 sq ft. If we wanted to live in Hong Kong, we’d move there. Vancouver is not Canada.

So we are leaving and returning to our home country which isn’t so bad anyway since the housing bubble has burst, people in houses that they buy, and we can afford a house in the capital city where they have laws against housing remaining empty due to limits on available property (Squatter rights).

Oh Sandy, thank you for this. I was born and raised in Vancouver but saw the writing on the wall around 2005. My realtor told me she wasn’t selling houses to locals any more… all the signs were there. I left Vancouver in 2007 and bought a house in Halifax. The real estate market is great out here, the job market… has not caught up with the times. Regardless, I have a baby now and I am planning to move back to Vancouver. I know that with the decision to move back to Vancouver, and to have my baby grow up with friends and family close by, I am also choosing to rent for the rest of my life. I will be following your work and I will participate in any way I can to help Vancouver to be reclaimed as a home to Vancouverites.

Foreign ownership needs to be regulated much more aggressively than it is now. Set property purchase limits, institue massive increases for foreign buyer RE purchase tax, and property tax or combination of all three. The city is being gutted out one property at atime by basically unregulated foreign RE buying.

Thanks for your post here, I’ve seen it shared on Twitter and various blogs quite a bit over the last week or so.

I have a question that hopefully you will be able to answer about the scenarios that are illustrated here. The housing market is, indeed, hyper-inflated and many have called it unsustainable, some going so far as to say the market with crash or the “bubble will burst”.

I’d like it if you (or anyone) could illustrate what the market would look like in a post-crash scenario? What does that look like for owners, buyers, sellers and tax assessors?

I am not an economist, actuary, or city planner and simply cannot capture all of the factors to build a realistic scenario, but I hope you, or someone, can. Potential outcomes would certainly give more weight to this movement and perhaps galvanize more people into action.

Right now the predictions are dire, but the outcomes are vague at best.

Needless to point out that this real estate bubble will not be sustainable for much longer. Where are the decision/ policy makers when they are needed to take the necessary corrective measures to ensure that the local populace can afford to live in their own back yard… no pun intended!

The bottom line to our extreme market conditions is that we need much more and much better data in order to tease out the cause and broader impact of our real estate market conditions.

My theory is that global capital is an important driver, though not in the way many suppose. I think its presence supports investor confidence throughout the value chain.

Alistair asks for a post-crash scenario. In fact I have two worries: either we are in a bubble, or we aren’t. Neither is very appetizing, to be honest. I’ll elaborate more on this in an upcoming post on Vancouver, China, India and navigating our new century.

It’s hard to predict a post-crash scenario, because it would be very different from the US housing crash, which was widespread and pulled trillions of dollars out of the US economy and threatened global financial stability. Our situation is much more contained.

I had no idea that a lot of houses on Vancouver’s West side are sitting empty. It’s as if their owners are treating them as they would bars of gold. Although not mentioned in the article, I wonder how much of this phenomenon might be due to the now longstanding low central bank rates worldwide. With our Bank of Canada rate sitting at only 1% and even lower in the U.S., government bonds can’t yield enough to even cover inflation. Perhaps it is forcing investors to seek unusual alternative vehicles in which to place their money. How unfortunate for us Vancouverites, though. I wonder if this “bubble” might last until the world’s governments finally get their books in order and start paying down their debt. (sigh)

Sandy: This problem does not need more study. Anybody with even the slightest understanding of global finance knows what’s going on here.

As with the banking crisis in the US, the problem begins and ends with the same word: speculation. Once the banks were allowed to speculate, it was all over but the crying.

Serious about solving this problem in Vancouver? Pass a law that prohibits anyone (or any corporation) from purchasing real estate without proof of residency. The speculation will stop the day the law is proposed, let alone passed, and Vancouver real estate will tumble by 50% to 60%.

So many of my friends and acquaintances have picked up and left Vancouver in the last few years due to this insanity. They are all high income tax paying professionals in their thirties. The latest BC stats seem to bear this out with a net decline in inter-provincial migration so far this year.

The real tragedy, which I suspect will become apparent once the bubble pops, will be those who have taken on too much debt. It seems that Vancouverites have been trying to compete with the influx of foreign money. One need only look at the rise of personal debt in BC over the last decade to realize that people are in way over their heads.

It’s ridiculous that Vancouverites, who pay a large portion of their incomes to support our social programs, have to compete with people who may earn their incomes in low-tax countries. It’s time to level the playing field.

I suggest that non-citizens from countries with low income tax (and lax environment controls) pay an additional large property tax if they want to buy from existing housing stock. It probably makes sense to generally shift BC taxes from income to property to reflect the myriad of ways tax-avoidance currently happening.

Great comments Sandy! I’m excited to see someone naming this crisis and bringing discussion of the topic to the table. As former residents of Vancouver, my husband and I have moved to Nelson in order to afford a home with beautiful natural surroundings. Now with a family, something I think Vancouver politicians overlook are the effects on other ammenities the vacancies will eventually cause. Where will the population come from to attend primary schools, ride transit routes, and patronize retail businesses? The homes may exist, but the users of the area libraries, rec centres, and theatres are all lacking. All these things decay and dissappear when faced with a decline in use. It’s sad to see locals suffer at the profits of a handful of investors.

This is very unfortunate that Vancouver’s leaders aren’t doing anything to prevent foreign speculative investment from ruining the lives and prospects of Canadians.

Empty houses? Why should that be a reality? Why not institute penalties for vacant houses after a certain period of time? That would eventually slow down speculative investment, and/or at least drive down rental incomes so normal Canadians can afford a place to live. And it makes sense too. Why should people be allowed to take a limited resource (land, which is very limited around there) and horde it to create false demand (as a collective) that destroys people’s lives and drives them out of their city? Or simply institute a residency requirement effective 2015. Make it several years in the future, to give the speculators time to adjust and try to sell off to the poor locals, that would also provide gradual downward pressure.

It is very unfortunate. I was considering moving to Vancouver to work at UBC as a Professor, but am now reconsidering, seeing that I would have a very low quality of life with grossly inflated housing prices in both the purchase and rental market.